When to Overspend on a House

5 occasions to overpay for a home

You’ve found the house. It's got the perfect blend of functionality, location, and that elusive "it" factor.

But there's a catch – it’s worth more than you were bargaining for.

Discouraged, you and your partner are forced to weigh up your options. Do you stick to your initial budget and risk losing your dream home, or do you consider stretching it, venturing into uncharted financial territory?

This is the age-old dilemma countless house hunters face and begs the question: how much should you "overspend" to secure a house that feels like home?

This guide explores scenarios where exceeding your initial budget might be a wise investment in your future.

Understand Your Budget

A common benchmark suggests keeping your housing costs (mortgage, council rates, insurance, upkeep) below 25% of your gross (pre-tax) income. Though many readers might laugh off such a figure as too low for the New Zealand property market.

If you need a mortgage the bank will do a financial stress test. This is when the bank simulates a higher mortgage payment to assess your ability to meet repayments should interest rates rise, for instance, and what reasonable lifestyle adjustments you would need to make to enable this.

When Overspending Makes Sense

1. When You Can Generate an Income

Some properties offer built-in income streams that can offset the higher initial cost.

The rental income from these spaces can significantly contribute to your mortgage payment, making the house partially self-funding.

However, remember to factor in any management costs, potential vacancy periods, and taxes when calculating the net income contribution.

Renting

Look for houses with built-in income potential like a finished basement apartment, a separate suite, or a "granny flat" (a self-contained minor dwelling on the same property).

These can be rented out long-term for a steady weekly income or listed on platforms like Airbnb for short-term stays.

Carefully consider the potential income each option offers. Long-term rentals can offer stability if you have a good tenant. Short-term rentals through Airbnb can be lucrative but come with management overheads and potential disruptions.

Boarding

Large homes with spare rooms offer the option of taking on flatmates who pay rent, also known as "boarders." Most New Zealand banks typically include income from up to two boarders in your mortgage affordability calculations, if your loan doesn't exceed 80% of the property value.

Subdivision

For some properties, the land itself holds hidden value.

Investigate the possibility of subdividing the section (plot of land) in the future.

This can involve creating a separate title for a portion of your land, allowing you to sell it or build another dwelling.

It’s important to note that subdividing requires council approval and comes with costs like surveying and infrastructure development. This isn’t always easy, and there’s plenty of traps for the inexperienced.

Ensure the potential profit outweighs the investment before factoring subdivision into your decision.

2. When the Higher Price Ticket Makes Sense

The price tag isn't the only factor to consider. A more expensive house may offer hidden benefits that justify the higher cost.

Here are some scenarios where this applies:

There’s a Higher Risk of Natural Disasters

While a house in a high-risk zone for earthquakes or floods might initially seem cheaper, remember – insurance costs can be significantly higher in these areas.

Events like the Canterbury earthquakes and Cyclone Gabrielle caused insurance companies to raise prices and tighten eligibility.

Investing in a slightly more expensive property in a lower-risk area could save you money in the long run and offer peace of mind during natural disasters. Research property data and insurance quotes to understand the long-term financial impact of a location before you buy.

There’s Hidden Costs for the Property with Potential

"Fixer-upper" properties advertised as having "potential" often come with a catch – extensive renovations that can be time-consuming and expensive.

While they offer you the opportunity to customise your dream home, factor in renovation costs and potential delays when evaluating affordability.

It’s also important to weigh the potential future value of a renovated property against the upfront investment required.

3. When It's Your Forever Home

Sometimes, overspending on a house becomes a carefully-considered investment, Here's a couple of examples:

Long-Term Appreciation

The New Zealand housing market has historically shown positive long-term growth.

While short-term fluctuations might occur, buying a house you plan to stay in for twenty years or more allows you to ride out market dips and potentially benefit from property value appreciation.

This appreciation can offset the initial higher cost and provide a nice return on investment when you sell one distant day. In other words, it may be that the more houses you buy today will mean you will access even greater capital gain.

Future Needs

Before making a purchase, it's essential to thoroughly consider how your life might change and choose a home that meets those future needs.

• Do you anticipate needing more room for a growing family?
• Would you like a dedicated home office for remote work?
• Perhaps you need a workshop for a side business, such as furniture repair?
• Maybe an elderly parent might move in with you, requiring a ‘granny flat’?

Of course, some of these features might be current demands too.

Investing in a house that accommodates both your current and future needs, helps to avoid the potential costs and drawbacks of buying a replacement home within a few years.

Related articles:

• How to buy your first home
• Prepare for a home auction, your guide
• When not to buy a home
• Increase your home value

4. Location, Location, Location

The right neighbourhood offers more than just curb appeal. It can offer intangible benefits like better schools, safety, or proximity to work, justifying a price premium.

Consider these factors, and more, when evaluating any location:

Top-Tier Education

Living in a desirable school zone can unlock access to high-performing public schools, meaning you might save yourself a fortune if you feel the only other realistic option is private schooling.

In Auckland, for instance, nabbing a house within the zone for Auckland Grammar and Epsom Girls' Grammar, two highly sought-after public schools, is a major perk for many families.

However, missing out on that zone and still wanting a good education for your child might mean looking at private schools like the prestigious St Kentigern, King's College, Diocesan School for Girls, and St Cuthbert's College.

A report by Fairfax revealed some parents are spending $33,000 per year on tuition alone (Christ’s College in Christchurch is one) to send their child to a private school.

Education researcher and former teacher Nina Hood told TVNZ’s Breakfast show that “there are some absolutely terrific state schools” in New Zealand.

She says this means parents are faced with a dilemma.

"Do you buy a house in the school zone that you want, or do you think about private school fees?" Hood asked.

Ray White agent Steve Koerber, who sells in and around Remuera, told One Roof people are less open to buying outside the grammar zone because then they tend to send their children to costly private schools.

When it comes to prices, this works both ways, “I have seen people buy lesser quality homes than what they could get outside [the zone] but they compromise because their cash flow is not compromised if their children are going to grammar.” Koerber says.

Reduced Commute

Living closer to your workplace can translate to significant time savings and reduced transportation costs.

If you’re a working couple and one of you can live within walking or cycling distance of the workplace, you might be able to get rid of one car and all associated running costs.

If you enjoy going out, consider the ease of access to shops, restaurants, parks, and entertainment options when evaluating a location's value.

Enhanced Safety

Many neighbourhoods boast lower crime rates and a stronger sense of community, offering peace of mind for families.

5. When it’s a Competitive Market

In a seller's market, exceeding your budget might be necessary to secure your dream home, especially if bidding wars are common.

However, caution is advised against emotional overspending just to secure the property.

Realistically, this might not be considered overspending at all, it’s simply meeting the market price.

Long-Term Considerations

Before you take the plunge, here are some important factors to mull over:

• Investment Potential: Consider the potential for future renovations or upgrades that may increase the home's value.
• Impact on Retirement Savings: Don't sacrifice your long-term financial security for a house payment you can barely afford. Striking a balance is crucial.
• Quality of Life: Evaluate how extra features or location of a more expensive house could contribute to your overall well-being. Does it reduce your commute, offer better amenities, better schooling, or provide space for work or hobbies?
• Prioritising Needs vs. Wants: Differentiate between essential features (bedrooms, bathrooms) and desirable features (pool, gourmet kitchen). Focus on fulfilling core needs within your budget.

The Bottom Line: There's No One-Size-Fits-All Answer to Overspending

Finding the perfect house is a deeply personal journey. It's not just about four walls and a roof.

While this guide has explored various scenarios where exceeding your initial budget might make sense, always be mindful the "right" price tag depends on your individual situation including your unique priorities.

Do you crave a vibrant downtown lifestyle, great schools for the kids, and a walk to work? A slightly higher price tag in a central location might be a wise investment, saving you on transportation costs and offering unparalleled convenience. Perhaps, your dream home has the potential to generate rental income or offers space for a home office, contributing to your financial security.

Ultimately, the "perfect" house isn't about stretching yourself thin. The key lies in a careful assessment of your current and future needs.